Legal Capacity to Enter a Contract: Definition & Examples

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  • 0:06 Legal Capacity
  • 0:55 Age of Maturity
  • 2:03 Free of Mental Illness
  • 3:25 Not under the Influence
  • 4:23 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

One of the elements of a contract is capacity. Capacity means that a person is legally able to enter into a contract. There are several things that make a person legally able to do so, including age and state of mind.

Legal Capacity to Enter Into a Contract

When two people enter into a contract, six elements must be met. Those elements include:

  • Offer that specifically details exactly what will be provided
  • Acceptance (the agreement by the other party to the offer presented)
  • Consideration (the money or something of interest being exchanged between the parties)
  • Capacity of the parties in terms of age and mental ability
  • Intent of both parties to carry out their promise
  • The object of the contract is legal and not against public policy or in violation of law

The element we will focus on is capacity, and it means a person's legal ability to enter into a contract. To best explain who can enter into a contract, let's use some examples of who is forbidden to enter into a contract.

Age of Maturity

For one, a person must be of the age of maturity, and the law sees this as age 18 or older. However, there are times when a minor can enter into a contract. This is true if the contract is for housing, food or things necessary to sustain life.

There are a few other exceptions to this. Let's say Billy, a 17-year-old, passes himself off as an adult and buys a new high-end stereo system on a payment plan. When his mom sees the stereo, she gets angry and calls the store to demand Billy's deposit back. The store owner has a right to retain Billy's deposit and hold him to the contract and the payment plan. You see, Billy falsely identified himself as being of legal age to contract for the stereo purchase.

To take this a step further, suppose Billy bought the stereo system the day before his 18th birthday. If he does nothing to cancel the contract prior to turning 18, he is obligated to the terms of the contract simply because he did nothing to cancel while he was still a minor.

Free of Mental Illness

It is also necessary for the parties to be free of mental illness, like schizophrenia or other conditions that challenge a person's mental state. There is a standard that courts use to determine whether a person truly understands the promises made in a contract. One test the court may perform is a cognitive test, and this determines whether meaning was understood by the party in the areas of reasoning and understanding language. A motivational test may also be used. This test determines whether a party suffers from delusions or mania. This is an important factor because this may skew a person's ability to understand the scope of the contract.

Murray suffers from bipolar disorder. When he is on medication, he is able to think and understand day-to-day events. However, when he is not medicated, his thinking becomes derailed. One fine day, Murray entered into a contract to purchase a home. The home was well beyond what he could afford. However, he did have a small nest egg in the local bank. Murray called the bank to request that the funds be transferred to the seller. A loan was taken out for the balance.

Murray's family may be able to void this contract because of his state of mind. Of course, there will be testing and documentation needed to prove his mental state. If proven that Murray lacks mental capacity, the deal will dissolve.

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